New Zealand PPP market moves forward

New Zealand is now an early stage Public Private Partnership (PPP) market and in 2012 the first two projects reached financial close.

After a short hiatus, the New Zealand PPP market is moving forward again with the recent procurement for the Transmission Gully road project. The scale of New Zealand’s infrastructure investment challenge is driving greater collaboration between public and private sectors.

The features and innovation offered by PPPs can be an important contribution to existing infrastructural procurement, but the approach to PPPs should be sensible. PPP will not be the best procurement option for the vast majority of projects, but in projects with specific characteristics it will offer clear advantages.

PPPs should be objectively considered in Better Business Cases. The suggestion that projects will not happen unless they are PPPs approach, which has occurred in other jurisdictions, should not be made here.

The PPP procurement process is built up around three components: risk transfer, efficiency and whole life considerations. Competition forces the optimisation of these components and plays a pivotal role in ensuring a successful procurement.

In order to get optimal results the public sector needs to encourage private sector participation and ensure competition occurs on a level playing field. Bid costs are considered an important driver of the level of competition. There has been discussion about PPP bid costs in various PPP forums following the first two deals. KPMG undertook a detailed market study for Infrastructure Australia on the issue of bid costs.

There seems to be a general consensus in New Zealand that all parties need to cooperate to seek ways to streamline the PPP procurement process in order to reduce lead time and costs. This publication provides background on the importance of PPP bid costs and the opportunities available for optimisation.

Bid costs

The introduction of the Treasury’s PPP team has enhanced the overall transparency and efficiency of the New Zealand PPP market. The team is tasked with supporting best practice, stimulating project activity and increasing the transparency of markets.

The team ensures that procurement authorities seek "value" by striking the right balance between the objectives of the parties involved. Authorities should push bidders as hard and as far as they can in a competitive process without jeopardizing the feasibility of the transaction. Should bidders be pushed too far, for example by over-detailed bid requirements or excessive risk transfer, the "value for money" will be suboptimal while the cost to bidders can rapidly increase.

In the end the cost incurred due to an inefficient procurement process becomes either a project cost (and therefore ultimately a cost to government), or a cost to the unsuccessful bidders incorporated into future bid costs. If these costs are borne by losing bidders, they then must assess the financial viability of participating in procurement processes where both the time and costs required can be substantial. Subsequent projects could be impacted if this occurs.

Unsuccessful bidders may either seek to recover costs incurred in subsequent bids, or they may elect not to participate in subsequent bids and thereby reducing the competitive pressure in future tenders.

Bidders undertake a probability of success test as part of their decision making process. In general, bidders look to be successful in one out of every two or three PPP deals for which they bid.

The procurement process and bid costs act as a barrier to the PPP market, particularly for some members of consortia. Without appropriate care the PPP market may become the preserve of a small number of large multinational bidders, which has the potential to undermine the competitiveness of the procurement process.

High bid costs mean also that transactions need to be of sufficient capital value to be commercially viable. Consequently smaller projects may not be suitable for the PPP approach. The public sector needs to actively manage bid costs for the private sector and continuously streamline the process to keep the bid cost reasonable. There are several opportunities to achieve this:

Procurement duration

The duration of a PPP tender process is one of the key drivers of tender costs. The tender process should have challenging but realistic timelines. All parties involved should adhere to these timelines so that there is certainty about the process. Public sector procurement teams should be organised in such a way that there is sufficient level of delegation so that decisions can be made quickly.

It should be noted that in the first two PPP projects the New Zealand procurement authorities and their teams of advisors managed to keep the procurement period close to international best practice levels (eg Hobsonville Schools PPP, on which KPMG advised, was completed within 12 months of EoI release).

The public sector needs to ensure that there is an appropriate trade off between the number of parties to be shortlisted (i.e. competitive tension, perceived chance of winning) and the bid costs (relatively to the size of the project) for the parties involved. A smaller number of shortlisted bidders also increases their probability of winning and recovering their bid cost.

Standardisation

Harmonisation of procurement processes, procurement documentation and PPP contracts will lead to time savings and cost reductions. The Treasury PPP team has demonstrated that its objective is to develop a New Zealand specific toolkit that learns from best practice successfully applied in other, mature, PPP markets.

Legislation, regulation and guidance dealing with PPPs must be clear to ensure the procurements function effectively and all stakeholders are treated fairly. Consistent legislation, regulation and guidance improve participants’ understanding of the system, increases efficiency, and reduces costs.

This approach ultimately encourages domestic and international private sector participation by providing potential bidders with confidence that the New Zealand PPP market is a reliable, proficient and transparent place to invest.

Information requirements

Canada has an international reputation as a leader in reducing the time and cost of bid processes. It has managed to decrease the private sector bid costs by reducing the information requirements, in particular the level of design detail required at the RFP phase.

There should be sufficient clarity about the project requirements to limit the changes for misinterpretation that may cause delay. High quality specifications and procurement documents will improve bid submission and reduce the time for discussion and negotiation.

Certainty will always be rewarded in bid evaluation, but approaches that allow bidders to weigh up where best to place their effort, rather than enforcing rigid compliance-style bid requirements, are more likely to result in a healthy market.

Due diligence

Where possible the procurement authorities need to execute due diligence investigations (e.g. geotech/seismic surveys) which will be made available to bidders via a data room. This can result in a significant saving in time and will reduce the duplication of costs.

Quality of procurement teams

A knowledgeable public sector procurement team, supported by experienced advisers, will ensure that the procurement process will be run professionally and that project documentation will meet high standards. This will ultimately reduce the time and effort that needs to be spent on discussions, and project requirements such as risk allocation, payment mechanisms, financing and tax.

Road ahead

It is critical for any PPP market that there is a pipeline of projects. This is even truer given New Zealand’s geographic isolation. A pipeline will demonstrate public sector commitment to PPP’s.

It will provide potential participants with more certainty that they will be able to recover their costs of building up their PPP bid capability (contractors, engineers, lawyers and financial/tax advisors) and the project bid costs of the bids that have been unsuccessful.

A reduction of bid costs in combination with a solid project pipeline will positively impact the future development of the PPP market in New Zealand.

A reduction in bid cost will lower the entry barriers for market participants and consequently increase the level of competition in the market. Furthermore bid costs will be factored into the overall cost of a PPP, thus bid cost savings should ultimately result in a reduction of the project costs or an increase in the value offered to the Crown. Streamlined PPP procurement processes will enhance the overall value for money proposition.

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